Competitive strategies define how a company tries to achieve a competitive advantage in the market. According to Michael E. Porter (1980), three basic types of strategies (“generic strategies”) can be distinguished:
- Cost Leadership
The aim of this strategy is to generate a comprehensive cost advantage within the industry in order to be able to offer products or services at a price below the market price. With other words, it attempts to win market share by appealing to cost-conscious or price-sensitive customers. An often-cited example of successful implementation of a cost leadership strategy is the German retailer Aldi. By leveraging economies of scale and focusing on non-branded items, Aldi was able to maintain its image as lowest-price provider for a long period of time.
Differentiation involves creating products or services that are perceived by customers as unique and for which they are willing to pay premium prices. Thus, competition is not based on price but quality. In order for such a strategy to work out, the distinguishing features should be difficult to copy by competitors. This calls for the ability to innovate. An excellent example of the use of a differentiation strategy is Apple. It frequently sets new industry trends through innovative product design and has cultivated a loyal customer base other companies can only dream of.
- Focus Strategy
Companies that use focus strategies concentrate on serving a narrow market niche. This may be a specific customer group, geographical region, or product line. Within the niche, they seek to achieve either a cost or differentiation advantage. The basic idea is that by focusing entirely on a particular market segment they will serve the needs of the target group better than competitors with a broad scope. The focus strategy is often used by start-ups.
Porter argued that in order to ensure long-term profitability, a company needs to make a choice between these three strategies. Otherwise, it runs the risk of getting “stuck in the middle.”
Due to changes in the competitive environment and production technologies, the postulate of the incompatibility of cost and differentiation advantages is increasingly being questioned. Instead, hybrid strategies are being discussed.
Porter, M.E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.